Definition of Shirking
The tendency to do less work when the return is smaller. Owners may have more incentive to shirk
if they issue equity as opposed to debt, because they retain less ownership interest in the company and
therefore may receive a smaller return. Thus, shirking is considered an agency cost of equity.
the process of an individual free-riding on a group effort because the individual’s share of the group reward is insufficient to compensate for his or her separate effort
The option of terminating an investment earlier than originally planned.
Part of the return that is not due to systematic influences (market wide influences). In
other words, abnormal returns are above those predicted by the market movement alone. Related: excess
Goods may be returned to the seller by the purchaser without restrictions.
A method of costing in which all fixed and variable production costs are charged to products or services using an allocation base.
a cost accumulation and reporting
method that treats the costs of all manufacturing components
(direct material, direct labor, variable overhead, and
fixed overhead) as inventoriable or product costs; it is the
traditional approach to product costing; it must be used for
external financial statements and tax returns
A methodology under which all manufacturing costs are assigned
to products, while all non-manufacturing costs are expensed in the current period.
Schedule of depreciation rates allowed for tax purposes.
A method of investment appraisal that measures
the profit generated as a percentage of the
investment – see return on investment.
the rate of earnings obtained on the average capital investment over the life of a capital project; computed as average annual profits divided by average investment; not based on cash flow
The accumulated coupon interest earned but not yet paid to the seller of a bond by the
buyer (unless the bond is in default).
The amount of interest accumulated on a debt security between
interest paying dates
The amount of interest owing but not paid.
Cumulative gains or losses reported in shareholders'
equity that arise from changes in the fair value of available-for-sale securities, from the
effects of changes in foreign-currency exchange rates on consolidated foreign-currency financial
statements, certain gains and losses on financial derivatives, and from adjustments for underfunded
This doctrine says that a nation is sovereign within its own borders and its domestic
actions may not be questioned in the courts of another nation.
A method of costing that uses cost pools to accumulate the cost of significant business activities and then assigns the costs from the cost pools to products or services based on cost drivers.
activity based costing (ABC)
A relatively new method advocated for the
allocation of indirect costs. The key idea is to classify indirect costs,
many of which are fixed in amount for a period of time, into separate
activities and to develop a measure for each activity called a cost driver.
The products or other functions in the business that benefit from the
activity are allocated shares of the total indirect cost for the period based
on their usage as measured by the cost driver.
activity-based costing (ABC)
a process using multiple cost drivers to predict and allocate costs to products and services;
an accounting system collecting financial and operational
data on the basis of the underlying nature and extent
of business activities; an accounting information and
costing system that identifies the various activities performed
in an organization, collects costs on the basis of
the underlying nature and extent of those activities, and
assigns costs to products and services based on consumption
of those activities by the products and services
Activity-based costing (ABC)
A cost allocation system that compiles costs and assigns
them to activities based on relevant activity drivers. The cost of these activities can
then be charged to products or customers to arrive at a much more relevant allocation
of costs than was previously the case.
The actual expenditure made to acquire an asset, which includes the supplierinvoiced
expense, plus the costs to deliver and set up the asset.
actual cost system
a valuation method that uses actual direct
material, direct labor, and overhead charges in determining
the cost of work in process Inventory
After-tax real rate of return
Money after-tax rate of return minus the inflation rate.
A grouping of sales producers according to region. Compare with Branch.
A form of organization commonly used by foreign banks to enter the U.S. market. An agency
bank cannot accept deposits or extend loans in its own name; it acts as agent for the parent bank.
A means of compensating the broker of a program trade solely on the basis of commission
established through bids submitted by various brokerage firms. agency incentive arrangement. A means of
compensating the broker of a program trade using benchmark prices for issues to be traded in determining
commissions or fees.
Agency cost view
The argument that specifies that the various agency costs create a complex environment in
which total agency costs are at a minimum with some, but less than 100%, debt financing.
The incremental costs of having an agent make decisions for a principal.
Mortgage pass-through securities whose principal and interest payments are
guaranteed by government agencies, such as the Government National Mortgage Association ("Ginnie Mae"), Federal Home Loan Mortgage Corporation ("Freddie Mac") and Federal National Mortgage Association ("Fannie Mae").
Conflicts of interest among stockholders, bondholders, and managers.
Conflicts of interest between the firm’s Owners and managers.
The analysis of principal-agent relationships, wherein one person, an agent, acts on behalf of
anther person, a principal.
Aggressive Cost Capitalization
cost capitalization that stretches the flexibility within generally
accepted accounting principles beyond its intended limits, resulting in reporting as assets
items that more reasonably should have been expensed. The purpose of this activity is likely to
alter financial results and financial position in order to create a potentially misleading impression
of a firm's business performance or financial position.
All equity rate
The discount rate that reflects only the business risks of a project and abstracts from the
effects of financing.
Total costs, explicit and implicit.
Allowance for bad debts
An offset to the accounts receivable balance, against which
bad debts are charged. The presence of this allowance allows one to avoid severe
changes in the period-to-period bad debt expense by expensing a steady amount to
the allowance account in every period, rather than writing off large bad debts to
expense on an infrequent basis.
Allowance for doubtful accounts
A contra account related to accounts receivable that represents the amounts that the company expects will not be collected.
Allowance for Doubtful Accounts
An estimate of the uncollectible portion of accounts receivable
that is subtracted from the gross amount of accounts receivable to arrive at the estimated collectible
Securities certificates issued in the U.S. by a transfer agent acting on behalf of the foreign
issuer. The certificates represent claims to foreign equities.
cost of a security adjusted for the amortization of any purchase premium or
Amortizing interest rate swap
Swap in which the principal or national amount rises (falls) as interest rates
The fund return, for any 12-month period, including changes in unit value and the reinvestment of distributions, but not taking into account sales, redemption, distribution or other optional charges or income taxes payable by any unitholder that would reduce returns.
Annualized holding period return
The annual rate of return that when compounded t times, would have
given the same t-period holding return as actually occurred from period 1 to period t.
a quality control cost incurred for monitoring
or inspection; compensates for mistakes not eliminated
through prevention activities
Arbitrage-free option-pricing models
Yield curve option-pricing models.
Arithmetic average (mean) rate of return
Arithmetic mean return.
Arithmetic mean return
An average of the subperiod returns, calculated by summing the subperiod returns
and dividing by he number of subperiods.
The ratio of total assets to stockholder equity.
attribute-based costing (ABC II)
an extension of activitybased costing using cost-benefit analysis (based on increased customer utility) to choose the product attribute
enhancements that the company wants to integrate into a product
authorized share capital
Maximum number of shares that the company is permitted to issue, as specified in the firm’s articles of incorporation.
Number of shares authorized for issuance by a firm's corporate charter.
The number of shares of stock that the company is legally authorized to sell.
Average accounting return
The average project earnings after taxes and depreciation divided by the average
book value of the investment during its life.
Average-Cost Inventory Method
The inventory cost-flow assumption that assigns the average
cost of beginning inventory and inventory purchases during a period to cost of goods sold and
Average cost of capital
A firm's required payout to the bondholders and to the stockholders expressed as a
percentage of capital contributed to the firm. Average cost of capital is computed by dividing the total
required cost of capital by the total amount of contributed capital.
Average rate of return (ARR)
The ratio of the average cash inflow to the amount invested.
costs that are identifiable with and able to be influenced by decisions made at the business
unit (e.g. division) level.
a streamlined cost accounting method that speeds up, simplifies, and reduces accounting effort in an environment that minimizes inventory balances, requires
few allocations, uses standard costs, and has minimal variances
An account receivable that cannot be collected.
The amount of accounts receivable that is not expected to be collected.
Refers to accounts receivable from credit sales to customers
that a business will not be able to collect (or not collect in full). In hindsight,
the business shouldn’t have extended credit to these particular
customers. Since these amounts owed to the business will not be collected,
they are written off. The accounts receivable asset account is
decreased by the estimated amount of uncollectible receivables, and the
bad debts expense account is increased this amount. These write-offs
can be done by the direct write-off method, which means that no
expense is recorded until specific accounts receivable are identified as
uncollectible. Or the allowance method can be used, which is based on
an estimated percent of bad debts from credit sales during the period.
Under this method, a contra asset account is created (called allowance
for bad debts) and the balance of this account is deducted from the
accounts receivable asset account.
Bankruptcy cost view
The argument that expected indirect and direct bankruptcy costs offset the other
benefits from leverage so that the optimal amount of leverage is less than 100% debt finaning.
Base interest rate
Related: Benchmark interest rate.
basic earnings per share (EPS)
This important ratio equals the net
income for a period (usually one year) divided by the number capital
stock shares issued by a business corporation. This ratio is so important
for publicly owned business corporations that it is included in the daily
stock trading tables published by the Wall Street Journal, the New York
Times, and other major newspapers. Despite being a rather straightforward
concept, there are several technical problems in calculating
earnings per share. Actually, two EPS ratios are needed for many businesses—
basic EPS, which uses the actual number of capital shares outstanding,
and diluted EPS, which takes into account additional shares of
stock that may be issued for stock options granted by a business and
other stock shares that a business is obligated to issue in the future.
Also, many businesses report not one but two net income figures—one
before extraordinary gains and losses were recorded in the period and a
second after deducting these nonrecurring gains and losses. Many business
corporations issue more than one class of capital stock, which
makes the calculation of their earnings per share even more complicated.
A cost that is incurred when a group of products or services are produced,
and which cannot be identified to specific products or services within each group.
a cost that is caused by a group of things
being made, handled, or processed at a single time
A signalling device.
Benchmark interest rate
Also called the base interest rate, it is the minimum interest rate investors will
demand for investing in a non-Treasury security. It is also tied to the yield to maturity offered on a
comparable-maturity Treasury security that was most recently issued ("on-the-run").
Also called on-the-run or current coupon issues or bellwether issues. In the secondary
market, it's the most recently auctioned Treasury issues for each maturity.
A method of securities distribution/ underwriting in which the securities firm agrees to sell
as much of the offering as possible and return any unsold shares to the issuer. As opposed to a guaranteed or
fixed price sale, where the underwriter agrees to sell a specific number of shares (with the securities firm
holding any unsold shares in its own account if necessary).
The requirement that a claim holder voting against a plan of reorganization
must receive at least as much as he would have if the debtor were liquidated.
Large and creditworthy company.
book rate of return
Accounting income divided by book value.
Also called accounting rate of return.
Book yield is the investment income earned in a year on a portfolio of assets purchased over a number of years and at different interest rates, divided by the book value of those assets.
book value and book value per share
Generally speaking, these terms
refer to the balance sheet value of an asset (or less often of a liability) or
the balance sheet value of Owners’ equity per share. Either term emphasizes
that the amount recorded in the accounts or on the books of a business
is the value being used. The total of the amounts reported for
Owners’ equity in its balance sheet is divided by the number of stock
shares of a corporation to determine the book value per share of its capital
Book value per share
The ratio of stockholder equity to the average number of common shares. Book value
per share should not be thought of as an indicator of economic worth, since it reflects accounting valuation
(and not necessarily market valuation).
Book Value per Share
The book value of a company divided by the number of shares
Bottom-up equity management style
A management style that de-emphasizes the significance of economic
and market cycles, focusing instead on the analysis of individual stocks.
a planned expenditure
Builder buydown loan
A mortgage loan on newly developed property that the builder subsidizes during the
early years of the development. The builder uses cash to buy down the mortgage rate to a lower level than the
prevailing market loan rate for some period of time. The typical buydown is 3% of the interest-rate amount
for the first year, 2% for the second year, and 1% for the third year (also referred to as a 3-2-1 buydown).
Foreign bond issue made in London.
The foreign market in the United Kingdom.
business process reengineering (BPR)
the process of combining information technology to create new and more effective
business processes to lower costs, eliminate unnecessary
work, upgrade customer service, and increase
speed to market
Mortgages in which monthly payments consist of principal and interest, with portions of these
payments during the early period of the loan being provided by a third party to reduce the borrower's monthly
Capital Cost Allowance (CCA)
The annual depreciation expense allowed by the Canadian Income Tax Act.
capitalization of costs
when a cost is recorded originally as an increase
to an asset account, it is said to be capitalized. This means that the outlay
is treated as a capital expenditure, which becomes part of the total
cost basis of the asset. The alternative is to record the cost as an expense
immediately in the period the cost is incurred. Capitalized costs refer
mainly to costs that are recorded in the long-term operating assets of a
business, such as buildings, machines, equipment, tools, and so on.
Capitalized Cost An expenditure or accrual that is reported as an asset to be amortized against
interest that is not immediately expensed, but rather is considered as an asset and is then
amortized through the income statement over time.
interest incurred during the construction period on monies invested in
assets under construction that is added to the cost of the assets.
costs that increase with increases in the level of investment in current assets.
the total variable cost of carrying one unit of
inventory in stock for one year; includes the opportunity
cost of the capital invested in inventory
The cost of holding inventory, which can include insurance,
spoilage, rent, and other expenses.
costs of maintaining current assets, including opportunity cost of capital.
CARs (cumulative abnormal returns)
a measure used in academic finance articles to measure the excess returns an investor would have received over a particular time period if he or she were invested in a particular stock.
This is typically used in control and takeover studies, where stockholders are paid a premium for being taken over. Starting some time period before the takeover (often five days before the first announced bid, but sometimes a longer period), the researchers calculate the actual daily stock returns for the target firm and subtract out the expected market returns (usually calculated using the firm’s beta and applying it to overall market movements during the time period under observation).
The excess actual return over the capital asset pricing model-determined expected return market is called an ‘‘abnormal return.’’ The cumulation of the daily abnormal returns over the time period under observation is the CAR. The term CAR(-5, 0) means the CAR calculated from five days before the
announcement to the day of announcement. The CAR(-1, 0) is a control premium, although Mergerstat generally uses the stock price five days before announcement rather than one day before announcement as the denominator in its control premium calculation. However, the CAR for any period other than (-1, 0) is not mathematically equivalent to a control premium.
The amount of cash expended.
Cash flow after interest and taxes
Net income plus depreciation.
Cash flow per common share
Cash flow from operations minus preferred stock dividends, divided by the
number of common shares outstanding.
Cheapest to deliver issue
The acceptable Treasury security with the highest implied repo rate; the rate that a
seller of a futures contract can earn by buying an issue and then delivering it at the settlement date.
Selecting specific assets for sale so as to record desired gains or losses.
The combination of all of the individual opinions about a stock's or security's value.
a cost related either to the long-term investment
in plant and equipment of a business or to the
organizational personnel whom top management deem
permanent; a cost that cannot be changed without longrun
detriment to the organization
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